New Players, Ties Surface in Trading Probe

Lack of Assistance Dogs Authorities in the SAC Inquiry

Federal authorities have failed in two attempts to enlist the help of individuals to gather evidence against
Steven Cohen's
SAC Capital Advisors LP as part of a wide insider-trading investigation.

ENLARGE

Bloomberg News

An independent analyst,
John Kinnucan,
has said he refused a Federal Bureau of Investigation request in October to record conversations with a client, whom he has declined to identify. That client is
Michael Steinberg,
a technology-fund manager at SAC division Sigma Capital Management, according to a person familiar with the matter.

The focus of FBI agents on SAC's Mr. Steinberg marks the first time a name of a current SAC employee has emerged in connection with the insider-trading investigation. Mr. Steinberg, who hasn't been accused of any wrongdoing, declined to comment.

SAC, a Stamford, Conn.-based hedge fund that manages $12 billion, last month received a subpoena—along with a number of other hedge funds and mutual funds in the probe—asking for trading records and emails, among other things. Mr. Cohen declined to comment through a spokesman. In a late-November letter to investors disclosing the subpoena, Mr. Cohen said the information request didn't suggest that "anyone at SAC has engaged in wrongdoing."

The Insider-Trading Probe: A Primer

The recent effort is the second time the government has struck out in a bid to obtain recorded conversations inside SAC as part of its insider-trading investigation.

The stumbles underscore the challenges the government faces in piecing together parts of its probe. The U.S. currently is preparing an insider-trading case that could involve bankers, consultants, analysts and traders at mutual funds and hedge funds. A federal grand jury in New York has heard evidence in the matter, according to people familiar with the matter.

One of several focuses of the probe involves scrutiny of researchers such as Mr. Kinnucan, who provide their clients with highly detailed analysis. The government is looking into whether such research in some instances involves disclosure of inside information.

In 2009,
Richard C.B. Lee,
a former hedge-fund manager who previously had worked for an SAC division, attempted to get hired by SAC after he had begun cooperating with the government in its investigation, according to a person close to the situation.

Mr. Lee signed a plea agreement with the government that stipulated he would provide information about the activities of SAC traders, a person close to the situation says. Mr. Lee's lawyer has said Mr. Lee is cooperating with the government and will continue to do so.

Mr. Steinberg, 38 years old, has worked at SAC since 1997; in 2001, he joined Sigma Capital, SAC's New York division, where he worked with former SAC manager,
Richard Grodin.

As a technology-fund manager, Mr. Steinberg is expected to keep Mr. Cohen up to speed on his thinking about technology stocks, a person close to the situation says. Mr. Grodin, who closed his fund, Quadrum Capital, last fall, received a subpoena as part of the insider-trading investigation last fall. Mr. Grodin didn't return calls for comment.

Sigma, with $1.5 billion under management, is aninvestment vehicle that includes a chunk of Mr. Cohen's personal money, people close to the situation say. It is an example of SAC's so-called trading "pods," which operate independently but feed information and profits back to SAC, people close to the situation say.

As reported in The Wall Street Journal last week, another SAC pod, CR Intrinsic Investors LLC is among several hedge funds that made big bets in some health-care stocks the government is investigating to determine whether traders received inside information. It couldn't be determined whether CR Intrinsic is being scrutinized for trading in these health-care companies. SAC has declined to comment on that part of the probe.

Mr. Kinnucan surfaced publicly after The Journal reported that the FBI had visited him on Oct. 25, threatening to arrest him at his Portland, Ore., home and asking him to wear a wire. Mr. Kinnucan—who received a subpoena in the investigation Friday asking for two years of records—says he has done nothing wrong and vows to fight any charges against him, which he believes are likely.

The cooperation of Mr. Lee, who is one of 14 defendants who have pleaded guilty in the government's 2009 insider-trading case against hedge fund Galleon Group, helped lead to one recent arrest in the current probe.

Mr. Lee was enlisted by the government to record conversations with an employee of Primary Global Research LLC, a Mountain View, Calif., expert-network firm, according to a criminal complaint filed against the employee last month in a New York federal court.

Expert networks like Primary Global set up meetings and calls with current and former managers from hundreds of companies for hedge-fund and other traders seeking an investing edge.

The Primary Global employee,
Don Ching Trang Chu,
was arrested on Nov. 24 by the government on charges of conspiracy and fraud in connection with the insider-trading charges. His lawyer has declined to comment.

A spokesman for Primary Global, some of whose consultants are being examined as part of the probe, declined to comment.

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